Aon Hewitt Targeted in Kickback Lawsuit Filed by Caterpillar Plan

The central claims in the proposed class action suggest plaintiffs feel they overpaid significantly for advisory services, with the excess payments essentially amounting to kickbacks returned to the defendants.

The latest example of Employee Retirement Income Security
Act (ERISA) industry litigation targets Aon
Hewitt for, in the words of plaintiffs, permitting excessive fees to be paid
and then taking kickbacks.

The challenge was filed in the United States District Court
for the Northern District of Illinois, Eastern Division. Lead plaintiff Cheryl
Scott commenced the action on behalf of herself and similarly situated participants
in the Caterpillar 401(k) Retirement Plan. Named as defendants are a number of
Aon Hewitt companies, including Aon Hewitt Financial Advisors, Hewitt Financial
Services and Hewitt Associates.

According to the text of the complaint, Scott is a retiree
and a participant in the Caterpillar plan, while defendant Hewitt Associates serves
and has served as the recordkeeper. Another provider, Financial Engines, is
also named in the text of the suit but is not actually challenged as a
defendant.

The central claims in the proposed class action suggest
plaintiffs feel they overpaid significantly for the services provided by
Financial Engines, with the excess payments essentially amounting to kickbacks
returned to defendant Hewitt.

As the text of the lawsuit lays out, “Scott and the other plan
participants who signed up for the service received advice from the third-party
firm Financial Engines Advisors. For periods prior to 2014, Financial Engines
provided services directly to plaintiff and other Caterpillar plan participants
and was paid directly from participants’ accounts. But the fee for those
services was significantly higher than it should have been because the
agreement between defendants and Financial Engines required Financial Engines
to kick back to defendant Hewitt a significant percentage of the fees charged
by Financial Engines, even though Hewitt and its sister company co-defendants
did not perform any investment advisory or other material services in exchange
for the payment they received.”

According to the complaint, such a payment-sharing arrangement violates
federal laws designed to protect retirees.

The text of the suit further suggests changes made to the
plan in recent years were not enough to ensure participants were getting a good
deal: “In 2014, the business arrangement between defendants and Financial
Engines was restructured and re-branded so that defendant Aon Hewitt Financial
Advisors, ostensibly providing the investment advice services to plaintiff and
other Caterpillar plan participants, directly charged to participants’ accounts
the fees for those services. But the re-branding of those services was cosmetic
only, and, through a sub-advisory agreement between [Aon Hewitt Financial
Advisors] and Financial Engines, all of the investment advice services provided
to plaintiff and other Caterpillar plan participants continued to be provided by
Financial Engines … Importantly, the financial arrangement between defendants
and Financial Engines did not change.”

Plaintiffs boldly go on to state that even after the change,
Aon Hewitt knowingly charge the “same excessive fee that had previously been charged by
Financial Engines, kept the same amount that had previously been kicked back to
defendants by Financial Engines, and paid the balance of the fee to Financial
Engines … From all that appears, the principal, if not the only, reason for the
re-branding of the service was to conceal the illegal kick-back.”

NEXT: More context
from the suit

A short fee schedule included in the text of the complaint
shows the fees charged by Financial Engines under the initial arrangement went
as follows: An account balance up to $100,000 brought a 0.40% of assets fee; a balance of $100,000.01
to $250,000.00 brought a 0.30% of assets fee; and $250,000.01 or more would see
an annual fee of 0.20% of assets.

“At no time during the period when Financial Engines was
providing investment advice directly to Caterpillar plan participants did
Hewitt directly notify Ms. Scott or other similarly-situated plan participants
that Hewitt was taking a 20% to 25% kickback on the amounts paid to Financial
Engines for ‘managed services.’ Yet, the required Annual Report of Employee
Benefit Plan filing that the Caterpillar plan submitted to the United States
Department of Labor for 2013 clearly shows that Hewitt was receiving 25% of the
advice fee paid and 20% to 25% of the managed account fee paid to financial
engines,” the complaint states.

“On information and belief, the Hewitt defendants recognized
that this kickback information was at-risk of being discovered through the
required public disclosures that were increasingly becoming available in
on-line repositories, as opposed to paper filings that were historically
difficult to access,” plaintiffs claim. This risk was, they suggest, what drove
the aforementioned “cosmetic changes” made to the advisory arrangement.

Plaintiffs suggest that, beginning in 2014, the Hewitt defendants
and Financial Engines “changed the structure of their arrangement to hide from
public scrutiny the kickback fees that Hewitt was receiving from Financial
Engines … In or around that time, although it was Financial Engines that
continued to perform the advisory services to Ms. Scott and similarly-situated
participants in the plans, including the Caterpillar Plan, Hewitt’s newly incorporated
sister company, Aon Hewitt Financial Advisers [AFA], purportedly became the
entity that would provide the plans with advisory services. Yet, in reality—and
for all intents and purposes—Financial Engines continued to do all the actual
work related to the investment advisory services that Ms. Scott and similarly-situated
participants in the plans were receiving.”

The claim is based on language taken from plan disclosures,
which reads, “AFA has hired Financial Engines Advisors LLC to provide
sub-advisory services. We rely exclusively on the proprietary software systems
and methodology developed and maintained by Financial Engines Advisors LLC, an
SEC-registered investment advisor, which is unaffiliated with AFA or any of our
affiliated companies, to create target allocations for participants.”

“By having the Plans’ sponsors hire AFA in lieu of Financial
Engines, and then having AFA enter into a sub-advisory agreement with Financial
Engines, whereby Financial Engines performed all the relevant work for Ms. Scott
and the similarly-situated plan participants, the Hewitt defendants were no
longer required to report the fees they received from Financial Engines,” the
complaint concludes. “Instead, AFA simply skimmed 20% to 25% off that fee for
the Hewitt defendants and paid the balance to Financial Engines as a
sub-advisory fee.”

Asked for comment, Aon Hewitt promptly replied that it has a policy not to discuss ongoing litigation: “We have an unwavering commitment to fee transparency and independent and unbiased retirement and financial wellness solutions. Our model has always been and will continue to be fully transparent about all sources of revenue and fees we receive, so that plan sponsors and plan participants fully understand the cost of their plans.”